Weekly Review

FY2010-The balanced budget that isn't. On July 15, 2009, lawmakers passed and Governor Quinn signed a $26.08 billion budget for FY2010, that is overly reliant on debt and one-time revenue. Continuing its irresponsible fiscal stewardship of the state's public pension system, state government has again decided not to use revenue to pay its required employer contribution, but instead cover its obligation with debt. To this end, the state will issue $3.466 billion in short-term pension notes. Illinois is then using the revenue that it otherwise would have used to pay its pension obligation, to cover the cost of some services to be provided in FY2010. About $2.23 billion of this revenue diversion is slated for human service providers. The governor has discretion over the remaining $1.23 billion.

Of course, beginning in FY2011, this pension debt has to be repaid over the next five years, with an estimated annual debt service cost of about $800 million. Note that, this new annual debt service payment of $800 million will have to be funded next year, in addition to finding $3.4 billion in new revenue to replace the note proceeds.

Other material one-time revenue sources used in the FY2010 budget that won't be available in FY2011 include $1.843 billion from the federal stimulus (the American Recovery and Reinvestment Act) and $356 million in fund sweeps. The state is also considering delaying payment of $3.2 billion to vendors.

FY2010 Budget Breakdown
APPROPRIATIONS	$26.08 B*
ONE-TIME, NONRECURRING REVENUES
Debt Proceeds from Pension Notes	$3.466 B
Federal Stimulus	$1.843 B
Fund Sweeps	$ .356 B
TOTAL NONRECURRING REVENUE	$5.665 B**
* Note: The FY2010 budget figure does NOT include at least $2.162 B in past due, unpaid bills carried forward from FY2009-and there is NO revenue source to pay it. **Note: That means over 21% of the FY2010 budget is covered with one-time, nonrecurring revenues not available in FY2011.

According to press reports, the budget includes around $2.1 billion in spending cuts and the possibility of an additional $1.1 billion in cuts later in the year, that the governor has discretion over. Governor Quinn also stated that he will to try to reopen union contracts with state workers to stop a scheduled raise totaling $125 million.

The $26.08 billion General Fund appropriation for FY2010 is $3.6 billion less than the General Fund appropriation for FY2009, representing 12.0% cut in nominal dollars. After taking inflation into account using the Midwest Consumer Price Index or the Employer Cost Index, funding levels are being reduced by either 13.1% or 14.9%.

These significant cuts coupled with an unsustainable and irresponsible budget based on short-term borrowing, one-time, nonrecurring revenue and deferred payments to providers are difficult to justify, given that the state is in the midst of a severe recession that will dramatically increase demand for services. In particular, the recession will undoubtedly increase the need for human services, the budget for which may be slashed by 14%. Instead of acting to support the state's economy and aid its struggling residents, this budget will have the opposite effect of increasing both public and private sector unemployment (for more information on how, see CTBA's report "Moving Forward") while eliminating critical supports for our most vulnerable people.

FY2011 Starting Budget Shortfall-Minimum
Replacement of One-Time FY2010 Revenues and Debt	$5.665 B
Debt Service on Pension Notes	$ .800 B
Carry Forward of Operating Deficits from FY2009/2010	$2.162 B
TOTAL MIMIMUM FY2011 STARTING DEFICIT	$8.627 B

Illinois poor fiscal health and practices haven't gone unnoticed by the rating agencies. Moody's Investors Services, which recently downgraded Illinois as a debt issuer from Aa3 to A1 (the lowest rating of any state other than California), may do so again in the near future. Moody's, noting that Illinois' decision to borrow against the pension system to help fund the FY2010 budget worsens the state's ongoing, structural deficit, issued a statement on July 16, 2009, stating that it is reviewing Illinois for an additional downgrade. Key among Moody's concerns was a "History of political unwillingness to provide sufficient funding to structurally balance the budget."

The Budget That Should Have Passed......

HB 174

Given the questionable FY2010 budget that resulted from a third consecutive year of special sessions the state has suffered through, it's hard to tell where political posturing ends and serious budget reform begins. At this juncture, after the proposal of "doomsday" budgets, the ongoing inability of the state to pay healthcare or human service providers or its pension obligations, and the failure of the state to invest in a quality education for all children, it should be clear to everyone that Illinois cannot cut its way out of its deficit problems. Simply put, Illinois needs tax reform that will generate more revenue, while modernizing the tax structure and reducing tax burden on low income families.

The good news is, HB 174, a modified version of SB 750 that was originally introduced by Senator James. T. Meeks (D-15), actually passed the Senate and creates a sound template for the type of fiscal reform Illinois sorely needs. It raises anywhere from $5.6 billion to $6.013 billion in new, recurring tax revenues, provides tax relief to homeowners and low income families, and provides additional funding for education.

Following are highlights of HB 174.

The Illinois individual income tax rate increases from 3% to 5%.
The standard exemption an individual taxpayer can claim against the state income tax increases from $2,000 to $3,000.
Property tax relief is provided by doubling the state personal income tax credit individuals may claim for the local property taxes paid on their principal residence in Illinois, from 5% to 10%.
Tax fairness for low income working families comes from a tripling of the state's Earned Income Tax Credit (EITC) from 5% to 15% of the federal EITC claimed.
The Illinois sales tax base is expanded to include 39 different consumer services, most of which are already taxed by one or more of our neighboring states.
Both K-12 and higher education funding will be enhanced starting in Fiscal Year 2011.

For a detailed analysis, see CTBA's HB174 Fact Sheet